Mutual funds have become a popular investment vehicle for individuals looking to grow wealth in a diversified, professionally managed approach. While mutual funds offer similar underlying benefits, they come in two predominant structures: open ended mutual funds and closed ended funds.
Understanding the differences between open ended and close ended mutual funds is critical to making informed decisions that are aligned with one’s financial objectives, liquidity needs, and risk profile.
What is Open Ended Mutual Fund?
An open ended mutual fund is distinguished by the high liquidity and flexibility it provides investors—a key highlight in any open end fund vs closed end fund comparison. These funds are popular due to their unique structure and characteristics that differ significantly from closed-ended variants.
Key Features of Open Ended Mutual Funds
1. Unlimited Issuance
New units can be issued without limits depending on subscription demand. This allows new investors to join or existing investors to inject more money conveniently.
2. NAV-based Pricing
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Units are bought and redeemed directly with the fund at net asset value (NAV), which is recalculated daily to reflect portfolio market value changes.
3. Direct Transactions
All transactions occur directly between investors and the fund, ensuring NAV-based pricing without discrepancies.
4. High Liquidity
Unlike fixed lock-ins with closed ended funds, investors can conveniently redeem units from open ended funds without restrictions.
5. Potential Exit Loads
While highly liquid, open ended funds may charge exit loads to discourage short-term withdrawals and add stability.
In summary, easy entry/exit, flexible transactions with funds directly at NAV and no limits on investment size make open ended mutual funds highly popular for meeting liquidity needs.
What is Close Ended Mutual Fund?
Closed ended mutual funds issue a fixed number of units during their initial public offering (IPO). Once the IPO is closed, the fund is listed on a stock exchange, and investors trade units from other investors in the secondary market.
Key Features of Closed Ended Mutual Funds
Closed end funds raise a predefined amount by issuing a set number of shares via an IPO. No new shares are issued after this initial offering.
2. Market-Based Trading
Shares trade through the stock market between investors like shares of listed companies, unlike buying/selling from the fund itself.
3. Potential Variation from NAV
As supply/demand influences share prices, the traded price differs from the net asset value (NAV).
4. Lower Liquidity
With a defined number of shares infrequently changing hands, closed ended funds tend to be more illiquid than open ended funds.
5. Maturity Period
Closed ended funds often have a set maturity timeline ranging from 3 to 15 years, after which they are either restructured or dissolved.
6. Buyback Options
Some funds offer buyback windows allowing investors the option to sell shares back to the fund before maturity as an added potential exit route.
Difference Between Open ended and Close ended Mutual Funds
Understanding the differences between open ended and close ended mutual funds is essential for investors aiming to choose the most suitable investment for their financial objectives. The table below provides a comprehensive comparison of these two types of mutual funds, highlighting their key distinctions across various factors.
| Comparison Basis | Open ended Mutual Fund | Closed ended Mutual Fund |
|---|---|---|
| Definition | Continuously issue new units to investors | Offer a limited-time opportunity for investors to purchase new units |
| Investment Amount | Investment can be made as low as ₹500 | Only lump sum investments are accepted. Usually, the minimum accepted amount is ₹5,000 |
| AUM | Assets Under Management (AUM) changes when new funds are included or redeemed | AUM is usually fixed post-initial offering |
| Subscription | Investors can subscribe to open ended funds throughout the year | Investors can subscribe to these funds during the New Fund Offer |
| Corpus | Can increase or decrease depending on demand | Fixed after the initial offer period |
| Analysis | Historical records are available to compare with similar schemes | Limited historical records are available, making comparison difficult |
| Fund Control | The fund manager’s control is limited due to potential redemptions | The fund manager exercises complete control as there are no redemptions |
| Issue Size | Unlimited units can be issued based on demand | Fixed issue size during the offer |
| Maturity | Do not have a fixed maturity | Come with a fixed maturity period, usually 3 to 5 years |
| Liquidity | They offer high liquidity | They offer no liquidity |
| Price Determination | Price is determined by Net Asset Value (NAV) divided by outstanding shares | Price is determined based on the supply and demand |
| Listing | Transactions are through the fund directly as it is not listed on the stock exchange | Listed and traded on stock exchanges |
| Tax Benefits | Tax benefits for investments in ELSS schemes | Usually, there are no specific tax benefits for investments |
Which Type of Mutual Fund Fits You Better?
When it comes to choosing between open ended and close ended mutual funds, it is important to understand the difference between open ended and closed end mutual funds examples. Each type comes with unique features and matches different investment goals.
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Below, we explore which type might suit you based on specific financial preferences, integrating the key benefits of open end vs closed end funds.
Benefits of Open Ended Funds
Open ended funds work well if:
1. Liquidity Needs
You want to encash investments anytime without locked periods freely, and you value no constraints on redemptions.
2. Convenience and Control
You want the simplicity of direct transactions with the fund house itself at up-to-date NAVs reflecting actual value.
3. Flexibility
You seek the agility to switch between fund schemes and alter allocations responding to evolving situations.
4. Regular Investments
You need periodic investments or withdrawals, only possible through features like SIPs and SWPs offered by open ended funds.
Advantages of Closed Ended Funds
Closed ended funds may fit better if:
1. Defined Investment Horizon
You want to commit capital for a predetermined period without interim liquidity temptations.
2. Long-term Growth
Your long-term financial outlook allows interim volatility tolerance and potentially higher maturity corpus.
3. Predictability
You prefer locked-in terms regarding fund duration, capital, and payouts. Minimized surprises or fluctuations.
4. No Immediate Liquidity Required
You do not need immediate access to your money and are comfortable with the concept that trading these funds takes place through the stock market, which does not guarantee immediate liquidity.
Conclusion
While comparing the difference between open ended and close ended mutual funds, open ended and close ended mutual funds have significantly different mechanics, both remain attractive vehicles for retail investors to generate portfolio returns across varying horizons.
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Evaluating aspects like liquidity preferences, ideal holding period, and market-linked dynamics can guide investors in selecting the appropriate structure that is aligned with their unique investment strategies and financial objectives.
FAQs
1. What is the fundamental difference between open ended and close ended mutual funds?
The major difference is that open ended funds can issue unlimited units and investors can buy or sell units directly from the fund at net asset value (NAV) on any business day. Close ended funds raise a fixed amount through IPOs issuing limited units and then get listed on exchanges for trading like stocks.
2. Which option offers greater flexibility to investors?
Open ended mutual fund schemes offer higher flexibility as investors can buy or sell fund units directly as per their needs at NAV-based prices on any business day. Close ended funds lock money for the fund tenure.
3. Can investors redeem their mutual fund units anytime in case of close ended funds?
Unlike open ended schemes, which allow daily redemptions, close ended funds lock in investor money for a defined maturity period. Units can only be sold on exchange. Redemptions are allowed on maturity at the prevailing NAV.
4. How do expense ratios and fund management fees differ between them both?
Due to economies of scale, open ended funds have lower expense ratios, while close ended funds have higher ratios. Fund management charges are also set off upon maturity in close ended schemes.
Author: All Content is verified by SMC Global Securities.
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